Merck CEO says taking risks is key for the company to succeed, help patients

Merck & Co. CEO Kenneth C. Frazier is convinced nearly everyone, from patients to long-term investors, wants the world's third-largest drugmaker to take big risks.

So Merck is plunging ahead in one of medicine's toughest challenges - finding a drug to slow Alzheimer's disease - despite repeated failures that have led most drugmakers to halt or scale back research on the No. 6 killer in the U.S. It's a particularly risky strategy because scientists are still unraveling exactly what drives Alzheimer's.

"When people question me (and ask) 'Aren't you putting a lot of money at risk for something that's hard?' I say, 'Isn't that exactly what the world wants a company like Merck to do?'" says Frazier, 58.

The company, based in Whitehouse Station, N.J., is taking risks even though it, like other major drugmakers, is being squeezed by the weak global economy, cuts in health care spending by governments, rising research costs and increased competition from cheap generic versions of drugs that once brought in billions.

Merck is pouring tens of millions into an experimental treatment for a new type of Alzheimer's drug meant to limit the main ingredient in the brain-damaging plaques believed to cause the disease. If it works, it could be the first drug to slow patients' mental and functional decline.

Roughly 100 Alzheimer's drugs have failed in the last couple decades. And the handful of medicines that have been approved only temporarily ease symptoms.

The Alzheimer's gamble is partly personal for Frazier, a Harvard-trained lawyer who became CEO in January 2011 after 19 years in various executive positions at Merck. His father, a janitor who raised Ken and his siblings in Philadelphia, died of Alzheimer's. Frazier and his wife had cared for him in their suburban Philadelphia home during his final years.

"My father, to me, was 10 feet tall," says Frazier, whose mother died when he was very young. "To see this disease take away his brain and to see him rendered like a child, it was devastating."

This isn't the first time Frazier has taken a big chance. After Merck pulled painkiller Vioxx off the market in 2004 because it doubled heart attack and stroke risks, Frazier, then Merck's general counsel, decided to fight about 50,000 patient lawsuits one by one, instead of negotiating a mammoth settlement covering most of them.

The strategy paid off. Merck won enough trials that, after four years of litigation, it was able to persuade plaintiffs' lawyers coordinating the cases to settle nearly all the lawsuits for $4.85 billion. That's a fraction of the $20 billion to $50 billion in liability analysts had initially predicted.

Merck's research bets haven't always paid off, though. The maker of Type 2 diabetes drug Januvia had a few promising drugs fail in tests recently. Among them were the highly touted cholesterol drug Tredaptive and a combo pill for patients with diabetes and high cholesterol called MK-0431E.

Still, the company, which has annual revenue of about $50 billion, got five medicines approved in the U.S. in 2011 and 2012, including breakthrough hepatitis C drug Victrelis. Merck also expects to apply for U.S. approval of five drugs in 2013: two allergy medicines, an anticlotting drug, a fertility treatment and an improved version of Gardasil, a vaccine that prevents sexually transmitted cancers. Other drugs already are under review, for conditions including insomnia and hardening of the arteries.

In an interview at The Associated Press headquarters in New York, Frazier talked about his plans for Merck, the future of the U.S. health care system and his meeting with President Barack Obama. Below are excerpts, edited for length and clarity:

AP: After your 14 years as a private practice attorney working with pharmaceutical clients, why did you choose to come to Merck?

FRAZIER: If you worked for Merck, you knew you were working for a company where scientists were driving the company strategy. The core of my job is to keep that cadre of world-class scientists going.

AP: What's your top accomplishment in the two years since you took over as Merck's chief executive officer?

FRAZIER: My biggest accomplishment is staying the course, I would say, at a time when investors are increasingly skeptical of pharmaceutical research and development. We are one of the companies that didn't cut our research budget. We said we weren't going to do that, and our stock got pounded initially. (The stock price fell 17 percent in barely 9 months, then steadily rebounded, climbing from just under $30 to around $43 now.) I'm feeling a lot better about it than I was a year ago.

AP: Why hasn't Merck reduced spending on drug research like many of its rivals?

FRAZIER: I'm going to continue to fund the important work we do in our laboratories. As long as we do that, we'll be able to recruit the world-class people who want to come to industry to do important work to translate basic science into medicines that make a difference to human beings. I think that's the core of what my job is about: to create an environment where the really good science happens inside Merck.

AP: How do you choose which diseases and types of drugs you want to research?

FRAZIER: We look at two things: Where's the scientific opportunity and where's the future patient demand? You don't want to repeat in areas where there are already good drugs available.

AP: As growth slows in developed countries like the U.S., international drug companies are fighting for market share in emerging markets such as China, India, Russia and Brazil. How is Merck's business in those countries?

FRAZIER: We're the fastest-growing company in emerging markets. We have a broad portfolio of products that meet the needs of their people for both infectious and chronic diseases.

Of 7 billion people alive today, 6 billion live in emerging and developing markets. We have a huge opportunity not only to grow our business, but more importantly, going back to what Merck stands for, to actually make a difference in the lives of the people in these countries. That's what gets me up in the morning. It is the next chapter in this company's history.

AP: Like most other big drugmakers, Merck has lost millions in revenue to generic drugs as big sellers such as asthma and allergy medicine Singulair, your top drug until it got U.S. generic competition in August, lose patent protection. How do you make up for that?

FRAZIER: We focus on the underlying growth of what's left of the portfolio. You either innovate or you become defunct. I want to make sure we are spending money wisely and getting a return on investment.

AP: Now that there are good, inexpensive generic drugs available for many common diseases, most big drug companies have switched their focus to specialty drugs - complex medicines for rare diseases that can command very high prices. What is Merck doing?

FRAZIER: We have a lot of investment in specialty and oncology research, but the next few important products are for primary care and Alzheimer's, too. Merck is still committed to primary care. We stayed in vaccines when everybody got out in the '80s. That's why you have Gardasil today.

AP: The drug industry supported Obama's Affordable Care Act, which will bring health coverage to about 30 million additional people. Now that it's being implemented, how will it affect your company - and the rest of the industry?

FRAZIER: I think we'll do well. I haven't done the calculations, but probably we'll make a little bit less. What's important is people can take their medicines. What's good for patients in the long run is good for us.

AP: What are some of the changes the U.S. should be making to control medical spending?

FRAZIER: We need to fix the misalignment of incentives, to stop paying for treatment volume rather than better care. I'd like to see a lot more spending on prenatal care and less at the end of life. Eighty percent of health care costs are driven by behaviors that can be controlled or modified - excessive eating, smoking and drinking. We need a massive behavioral change.

AP: You joined several CEOs in a meeting with Obama in Washington late last year to discuss deficit and debt reduction. What did you tell the president?

FRAZIER: The president invited CEOs from different industries to hear what we thought, and whether or not we were prepared to support his approach, which calls for higher taxes on the wealthiest 2 percent. I support tax revenue increases, including the top 2 percent, but only if accompanied by responsible spending limits. The key is balance.

I talked to him about the importance of innovation, and I think the president understands that. I do worry that as we try to fix this long-term debt and deficit situation that we don't destroy the market incentives for biomedical research. What I fear is the government using its considerable clout to say, 'Here's the price we're setting for your medicines.'